Avoiding Multifamily Pitfalls: Verifying Tenants before Closing

The due diligence period is an important process when considering the purchase of investment properties, especially multifamily properties. Typically, buyer and seller negotiate a time-period that buyer can use to ascertain whether a piece of property is suitable enough to meet their intended purpose and/or goals. This includes inspecting and verifying leases, property condition, and ascertaining third-party vendor contracts that will transfer with the sale, among other considerations. However—¦

What happens when something unexpected occurs after the due diligence period ends, for example, when a tenant decides to move out shortly before closing and they sublet their unit to someone else, or worse, someone who ends up being a bad tenant without advising or obtaining permission from the former manager and/or the seller?

The Eviction Process: Going Through the Motions

Once closing has occurred, a new owner will have no other choice but to comply with local landlord-tenant laws when dealing with unauthorized occupants. Under the law, even unauthorized occupants have certain rights, especially if the former property owner or manager accepted even a partial payment from them. It can create an implied tenancy. In any case, unless you are dealing with blatant tresspassing, the law prescribes a certain sequence of events that must take place in order to avoid violating the law.

The whole process can take up to 6 weeks depending on the jurisdiction to obtain a proper eviction or an "Unlawful Detainer", which includes serving notices, setting court dates, and getting on the sheriffs‘ calendar when, and if, the court or commission grants the eviction. For new investors, this may seem like a daunting and unpleasant experience. However, when systematically handled, the process becomes an expected part of doing business as a multifamily investor. A good eviction service and/or a real estate attorney are ideal support systems to have during this time.

A Solution: Know What You are Taking Over before Closing

One way to ensure that tenants on the leases are the actual occupants in the units is to insert a clause in the offer that renders closing subject to verifying the tenants as current occupants. It would also be wise to include remedies within this clause in case buyer discovers the presence of unauthorized occupants during the verification process. This way, buyer and seller have pre-agreed in writing how they will handle the situation upon the discovery of unauthorized residents. Any competent real estate attorney can draft the appropriate language of such a clause, or a real estate broker can have their attorney draft the necessary language at no cost to buyer. Either way, there should be something in writing to address the issue of unauthorized tenants before closing. It is a small measure that will go a long way to reduce the chance of having to deal with an eviction process upon taking possession of an apartment building. However, depending on the experience level of an investor, taking responsibility for dealing with necessary evictions may not even be an issue.

There are some experienced investors who specialize in taking over problem properties along with all related tenant issues. These investors are aware of any problems upfront. Their experience level affords them the ability to accept responsibility for handling evictions and to take swift action in cleaning up and turning these types of properties around. They usually do so at a premium at time of purchase. This type of investor will factor the cost of taking on these problems in his or her final purchase price.

(photo: www.jdavisarchitects.com/)

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